Mt. Airy Refining Company v. Schlesinger

No. CA-79-1366 (481 F. Supp. 257, 13 ERC 1641) (D.D.C. August 21, 1979)

ELR Digest

The district court remands, for violations of the Department of Energy Organization Act and the National Environmental Policy Act (NEPA), regulations issued by the Department of Energy (DOE) amending the domestic crude oil allocation plan so as to adjust the economic benefits given small refiners pursuant to the "entitlements program," also known as the "small refiner bias." In its notice of proposed rule making to adjust the small refiner bias, 43 Fed. Reg. 54652 (Nov. 22, 1978), DOE disclosed only its intent to reduce the benefits paid to small refiners. The agency's failure to provide notice of its intent to phase out the program altogether violates the procedural requirements of the DOE Organization Act, 42 U.S.C. § 7191(b)(1), and requires that the regulations be repromulgated. The court upholds the regulations, however, against claims that they are (1) not supported by the administrative record because DOE gave inappropriate weight to much of the evidence contained therein and (2) invalid because they were not submitted for review to both houses of Congress as allegedly required under the Energy Policy and Conservation Act.

Finally, the court determines that the regulations were issued in violation of NEPA. To the extent that the final regulations were expressly proposed in the notice of proposed rule making, DOE properly concluded that the action would not have significant environmental effects and thus would not require preparation of an environmental impact statement (EIS). However, that negative determination was based solely on the foreseen impacts of the regulations that were proposed and did not refer to the impacts of phasing out the small refiner bias entirely, an action which was not revealed until the regulations were finalized. After evaluating plaintiffs' claims of irreparable injury, the balance of harms, and the public interest, the court enjoins implementation and remands those parts of the final regulations that were neither properly noticed in the notice of proposed rule making nor subjected to environmental analysis under NEPA. The remainder of the final regulations, however, are left in effect. That portion of the court's opinion dealing with NEPA and the formulation of relief are reprinted below.

4. The plaintiff's last argument involves the National Environmental Policy Act (NEPA) which under § 102(2)(C) requires, in part, that each federal agency:

include in every recommendation or report on . . . major Federal actions significantly affecting the quality of the human environment, a detailed statement by the responsible official on —

(i) the environmental impact of the proposed action,

(ii) any adverse environmental effects which cannot be avoided should the proposal be implemented,

(iii) alternatives to the proposed action

This detailed report is called an Environmental Impact Statement (EIS) and, under the terms of the statute, is required only when there is a "major Federal action significantly affecting the quality of the human environment". Ordinarily, it is the agency itself which must determine whether these three statutory prerequisites are present, and if it is required to compile an EIS under the terms of NEPA. Hanly v. Kleindienst, 471 F.2d 823 (2d Cir. 1972), cert. denied, 412 U.S. 908, 93 S. Ct. 2290, 36 L. Ed. 2d 974 (1973).

This Court is asked to review the adequacy of DOE's decision that "the proposed changes to the small refiner bias will not have any significant impact on the quality of the human environment in any respect . . ." (Ad.Rec. Vol. X, p. 6712). The plaintiffs argue that the proposed action will "significantly" affect the quality of the human environment, and take issue with DOE's conclusion to the contrary. Plaintiffs also contend that an EIS is required if there are arguably significant effects and that the issuance of the Environmental Assessment (EA) by DOE was so late and superficial as to disregard the requirements of NEPA.²⁹ Defendant argues that the EA did adequately analyze the question of "significant" harm and that all procedural requirements were indeed met.

It should first be noted that, as stated above, it is the agency's responsibility to comply with NEPA. Agencies ordinarily make a "threshold" decision to determine whether the proposed action will meet the three NEPA requirements for the preparation of an EIS. If it is initially determined that the proposed action does meet the criteria, then an EIS is compiled. If the threshold determination is negative, then no EIS is prepared. DOE's regulations regarding this threshold determination are found at 10 C.F.R. § 208, at seq., and provide that DOE will first prepare an EA to determine whether the proposed action will be major and will significantly affect the quality of the environment. 10 C.F.R. § 208.4. In this case, DOE's EA concluded that no EIS was required. The issue, then is whether DOE's decision is sufficient as a matter of law.

In Maryland National Capital Park & Planning Commission v. U.S. Postal Service, 159 U.S. App. D.C. 158, 168, 487 F.2d 1029, 1039 (1973), the Court of Appeals for the District of Columbia Circuit addressed the question of what approach should be taken to review an agency's environmental assessment where the environmental impact is identified but not thought to require the preparation of an EIS.

We believe that an "assessment" statement must provide convincing reasons why a construction project with "arguably" potentially significant environmental impact does not require a detailed impact statement. In this sense we agree with both the majority and the dissent in Hanley II, supra. We agree with Judge Friendly's dissent that in cases of "true insignificance" an impact statement is not required, and, thus when there are "arguably" cases of true significance, an impact statement is required. 471 F.2d at 837. On the other hand, we can rely on a review of the record, here consisting of the "assessment" as supplemented by other submissions . . . to determine whether the agency has supplied convincing reasons why potential impacts are truly insignificant.

To help determine whether a possible impact was truly insignificant or whether it is "arguably" significant, the court formulated three questions to apply to an agency's determination: 1) did the agency identify the relevant areas of environmental concern, 2) did the agency take a hard look at the problem, as opposed to a bald conclusion unaided by preliminary investigation, and 3) did the agency make a convincing case that the impact is insignificant as to the problems studied and identified.

Applying this framework to the EA with particular regard to the possible environmental effects resulting from DOE's regulations designed to phase out the small refiner bias in conjunction, with the entitlements program, the Court finds that the EA, as it presently stands, does not meet the requirements of NEPA.

From a review of the record in the context of the bias phase-out formula, it is clear that each of the areas of environmental concern brought to the Court's attention by the plaintiffs was not the subject of a "hard look" as it related to the effects of the bias phase-out formula. Neither the draft regulatory analysis published with the November NPRM (Ad.Rec. Vol. V, p. 2825), nor the Environmental Assessment published in April, 1979 (Ad.Rec. Vol. X, p. 6672) in any way examined the effects of the bias phase-out or the effects of any alternative to accomplishing this goal. In the Evaluation of Comments on the Environmental Assessment, published April 26, 1979 (Ad.Rec. Vol. XI, p. 7552) the only reference to the phase-out formula was as follows:

Although the final rule being issued by ERA on the bias differs somewhat from the one proposed in the November Notice of Proposed Rulemaking, this difference simply has the effect of phasing out the bias over the period of time between now and 1981 when it would expire in any event. In effect, it only removes the requirement which would arise, as noted in the Notice of Proposed Rulemaking, to adjust the bias program further as the entitlements program is phased out. This does not alter the results of the analyses in the EA that no significant environmental impacts will result from the amendments to the bias program. Id. at 7573.

The scope of the EA, however, was directed solely to possible impacts of the amendments published in the November NPRM, which as seen above, in no way included a formula designed to phase-out the bias. This is evident from the comments which the EA makes about specific areas of environmental concern which are directed only to the impact of the proposed rules. For example, with regard to the November NPRM rules impact on the refining industry in general, the EA states:

The estimated impacts of the proposed changes on various segments of the refining industry are set forth in the draft regulatory analysis dated November 15, 1978. . . . This reduction and reapportionment of the benefits would result in an average decrease in benefits from present levels for refiners with capacities below 50 MB/D and an average increase in benefits for refiners with capacities between 50 and 175 MB/D (Ad.Rec. Vol. X, p. 6679)

As regards the assessment of the impact on refiners of unleaded gasoline, the EA went through the various groups of small refiners, identified their unleaded gasoline production capacity, and then identified the level of benefits each group would be receiving. Nowhere was there an analysis of how a scale-down in bias benefits might affect these small refiners or any other small refiners over a two-year phase-out period.

Perhaps most significant is DOE's treatment of the principal environmental impacts from the proposed November NPRM rules which would arise either from an increase or decrease in refinery activity. (Ad.Rec. Vol. X, p. 6689). DOE discussed the effect of the proposed amendments and drew specific conclusions from those particular amendments. No adjustment was ever made for the changes in the final regulations.

The amendments now proposed by DOE would, in effect, return benefit levels for small refiners to approximately the same order of magnitude as was in effect from the initiation of the program until its sizeable increase in March of 1976 . . . The continuity and stability of small refining operations under 50 MB/D prior to March 1976 is evidence that the benefit levels in effect at that time were, at the least, sufficient to support the viability of those small refining operations which existed at the commencement of the program, and could have been in excess of actual operating margin differentials between large and small refiners. (Ad.Rec. Vol. X, p. 6693).

The real question which was ignored is whether under the May regulations formula the benefit levels would be sufficient to support the small refiners' viability and whether any consequences would flow therefrom. This gap is also reflected in the agency's conclusions regarding the effect of the proposed regulations on refinery activity in general:

Given the record of small refiner stability during the November 1974 — March 1976 period when benefit levels were significantly lower than current levels, and given the documentation of the Gordian analysis supporting the adequacy of a reduced benefit level, DOE does not believe that the proposed action would cause any significant increase or decrease in the refinery activity of those refiners under the 50 MB/D which have been in operation since the initiation of the program. (Ad.Rec. Vol. X, p. 6694) (Emphasis added.)

Similar analyses for the effects on air quality, water quality, noise and land use were all based on the effects of the November NPRM proposed rules. As for any socioeconomic impacts, DOE's analysis was that:

. . . any negative impacts of the proposed action sufficient to cause closedowns of small refineries, and thus production losses, can be expected to be confined almost entirely to those refineries which have come into existence during the course of the bias program. (Ad.Rec. Vol. X, p. 6700) (Emphasis added.)

The limitations, and in this situation the fatal defect, of the EA can be seen in its conclusion concerning the significant impact which the regulations as proposed, and not as finalized, would have:

The proposed changes to the small refiner bias will not have any significant impact on the quality of the human environment in any respect . . . . (Ad.Rec. Vol. X, p. 6712) (Emphasis added)

The formula to phase-out the entitlements program obviously goes deeper than a mere "further adjustment" of the bias levels. It should be clear that DOE did not simply substitute the flexible for the fixed dollar formulas in this regard. Rather, DOE substituted a flexible bias for a fixed bias designed to eventually eliminate that bias. Any issue which involves the ultimate elimination of the program fundamentally changes the structure of the benefits in a way completely different from that proposed in the November notice. No assessment of how this change would affect the environment was made beyond the statement that "This does not alter the results of the analyses in the EA that no significant environmental impact will result from the amendments to the bias program." (Ad.Rec. Vol. XI, p. 7572) The proceedings involved with this issue, however, do not show that DOE based this conclusion on an investigation as to the effects of the phaseout, nor do they reflect that the agency engaged in a substantial inquiry into the facts that was both "searching and careful". Greater Boston Television Corp. v. Federal Communications Commission, supra, 143 U.S. App. D.C. at 392-394, 444 F.2d at 850-853.

The fact that no comments were received by the agency in response to the publication of the EA perhaps reflects the fact that interested parties had no notice from the EA that this phase-out formula was to be included in the final rule. What few comments were sent in prior to the EA's publication concerned only the general subject matter notice published in the November NPRM and raise some questions of hardship and the necessity for other replacement programs if phase-out were to occur. (See Ad.Rec. Vol. V, pp. 3613, 3601; Vol. VI, pp. 3863, 4230; Vol. VII, p. 4607) Neither of these issues was subsequently addressed by DOE.

The importance of adequate reasons to support an agency's conclusions that an EIS is not necessary was underscored in Scientists' Institute for Public Information v. Atomic Energy Commission, 156 U.S. App. D.C. 395, 411, 481 F.2d 1079, 1095 (1973):

A statement of reasons will serve two functions. It will ensure that the agency has given adequate consideration to the problem and that it understood the statutory standard. In addition, it will provide a focal point for judicial review of the agency's decision, giving the court the benefit of the agency's expertise.

Here, the Court cannot accept DOE's conclusory statement that the particular phaseout formula chosen will not cause the May regulations to significantly affect the quality of the human environment. On the basis of the present record, DOE's conclusion is clearly unreasonable as well as arbitrary and capricious. The Court is not finding that this conclusion can never ultimately be proven correct, but until the Court can be assured that the issue has been studied, debated, and that it has been supported by an adequate statement of reasons, the requirements of NEPA have not been met.

A different conclusion must be reached, however, regarding DOE's compliance with NEPA relating to the impact study made of the November NPRM amendments. Here, the Court finds that the agency's decision not to file an EIS with regard to these amendments was neither unreasonable nor arbitrary and capricious. Therefore, to the extent that the May regulations adopted the amendments proposed in the November NPRM, the plaintiffs' arguments must be rejected.

First, that the agency did take a "hard look" at the possible impacts is abundantly reflected by the record. When the text of the proposed amendments was first published in the Federal Register on November 22, 1978, they were accompanied by a draft regulatory analysis which set forth the objectives and justification for the proposed rule changes and which qualified and described the expected impacts of the proposed modifications. Part of that impact study was to look at how the refining companies themselves would be affected. A similar analysis of product prices and possible alternatives was also made. Comments were invited on these subjects.

The Environmental Assessment itself evaluated these comments and drew reasoned detailed conclusions with regard to specific environmental concerns. The areas of water quality, noise and land use were examined. With regard to air quality, the EA examined the possibility of a reduction in the production of unleaded gasoline and on the basis of statistics concluded that those refiners likely to be impacted by the proposed regulations account for only .3% of unleaded gas shipments. (Ad.Rec. Vol. X, p. 6696) As for socioeconomic effects, the EA concluded with a statement of reasons that there would be little or no effect on the supply and price of gasoline resulting from the proposed bias levels although no assessment was made on possible unemployment resulting therefrom.

Perhaps the most important part of the EA concerned a review of the effect the proposed bias levels would have on future refinery expansion and any resulting increases or decreases of refining activity. Again the EA had reasons supporting its conclusions that if anyone were to be affected it would be refineries accounting for 1.5% of the total domestic refining capacity and that the amount of oil actually affected would be too small to be significant. (Ad.Rec. Vol. X, pp. 6689-6695)

In response to the demand for comments on the EA, 17 different comments were submitted by 16 individuals, including 7 comments from major and large independent refiners, 6 small refiners, two trade associations representing small refiners, two from the Environmental Protection Agency and the South Coast Air Quality Management District of California. Two of the named plaintiffs in this action, Mt. Airy Refining Company and Peerless Petrochemicals, Inc. submitted comments which reflected the same environmental concerns which have been raised in the instant action. The plaintiffs' comments first challenged the accuracy of DOE's assessment that the proposed regulations would not cause any significant increase or decrease in the refinery activity of refiners of a certain size who had been in operation since the initiation of the small refiner bias program. The plaintiffs mentioned that their "particular concern" was the environmental and economic impact in light of "reduction in Iranian imports, related OPEC increases, and President Carter's recent action to decontrol crude oil". (Ad.Rec. Vol. X, p. 6726) Plaintiffs argued that the Gordian report did not anticipate the Iranian Oil shortage and that this in combination with the other factors would cause widespread shutdowns of small refiners.

Plaintiffs brought three more points of contention to the agency's attention. First, the EA was said to fail to consider the "impact on the available supply of low sulphur residual fuel oil to meet domestic needs". (Ad.Rec. Vol. X, p. 6728) Second, a reassessment was called for "after thorough analysis of the impact of crude oil decontrol upon the refining industry as a whole and upon the small refining segment in particular". (Ad.Rec. Vol, X, p. 6727) Last, plaintiffs argued that air pollution caused by increased refining activity by larger refiners to make up the loss of some small refiner capacity would take place in heavily populated areas and that this would increase present levels of air pollution.

Each of these concerns was responded to by the agency in its Evaluation of Comments (Ad.Rec. Vol. XI, p. 7552) with rational arguments supporting DOE's conclusions. It is not up to the Court to determine whether it agrees with the agency's final conclusions. Rather, under the arbitrary and capricious standard, the agency's decision must be upheld if a rational basis exists for it. Ethyl Corp. v. Environmental Protection Agency, supra, 176 U.S. App. D.C. at 409, 541 F.2d at 27. This record reflects that with regard to the rules proposed in the November NPRM, the agency did focus on the significant environmental problems and did take a hard look at the environmental problems involving the proposed rules.

II. Irreparable Harm

The second criteria set forth in Virginia Petroleum Jobbers is whether the plaintiffs have shown that without the requested relief they will suffer irreparable harm. In this regard, the Court is cognizant of the importance of the small refiner bias within the economic structure of the federal government's regulation of the petroleum industry. This is partially reflected in the Gordian Report:

At the time the (entitlements) program was initiated, FEA concluded that small refiners needed more than equalized crude cost, that they needed additional assistance as well to remain competitive. (Ad.Rec. Vol. I, p. 31 see also Vol. V, p. 2816)

If it were solely a question of alleged economic injury as a result of the reductions in the bias as proposed in the November NPRM, the question of severe economic impact as a justification for injunctive relief would be in doubt. The May regulations, however, adopted a formula where the bias levels are set to proportionately decrease as the price of crude oil is decontrolled, and as noted above, while DOE assessed the economic impact of the proposed regulations, it did not adequately do so with regard to the formula designed to phase out the bias in direct proportion to oil decontrol. Although plaintiffs argue that such a loss of benefits would not permit them to compete and would deny them their financial base to operate, the Court has not been presented with sufficient evidence to establish that this result will necessarily occur. On the basis of the evidence presented to the Court, any decision to stop refining activities would seem to rest on the willingness, not the economic ability, of the entrepreneur to continue. This situation is not, therefore, similar to Armour and Company v. Freeman, 113 U.S. App. D.C. 37, 304 F.2d 404 (1962), cert. denied 370 U.S. 920, 82 S. Ct. 1559, 8 L. Ed. 2d 500 (1962), cited to the Court by the plaintiffs, where Armour only had two choices of either withdrawing its product from the market or damaging its good name. There is no such forced result here, and an otherwise valid regulation will not be enjoined on the grounds that one segment of the regulated class suffers economic loss not shared by other members of the class. Bowles v. Willingham, 321 U.S. 503, 518-519, 64 S. Ct. 641, 88 L.Ed. 892 (1943); Air Transport Association of America v. Federal Energy Office, 382 F. Supp. 437 (DCDC 1974).

A clear basis for irreparable harm, however, does result from DOE's failure to conform to the procedural requirements of NEPA. In Jones v. District of Columbia Redevelopment Land Agency, 162 U.S. App. D.C. 366, 376-371, 499 F.2d 502, 512-513 (1974), the court addressed the role of injunctive relief in a similar situation with regard to irreparable injury:

The purpose of equitable intervention, in cases in which federal agencies have failed to comply with NEPA's requirements is to ensure that such compliance will take place before there has been an 'irretrievable commitment of resources'. It may be that preparation of the statement will, in the end, not move the agency from adherence to decision it has already made. But it is not for the courts to prejudge.So long as the status quo is maintained, so long as the environmental impact statement is not merely a justification for a fait accompli, there is a possibility that the statement will lead the agency to change its plans in ways of benefit to the environment. It is this possibility that the courts should seek to preserve.

Despite the fact that the instant case involves the preparation of a proper environmental assessment and not the completion of a full EIS, without injunctive relief the May regulations will start to have their intended effect and this effect will take place without the benefit of a proper environmental assessment.

VII

III. Harm to Other Parties

In Virginia Petroleum Jobbers, supra, the court noted that despite affirmative findings in the above two categories, courts should be hesitant to issue an injunction if such actions would have a harmful effect on other persons. "Relief saving one claimant from irreparable injury, at the expense of similar harm caused another, might not qualify as the equitable judgment that a stay represents". 104 U.S. App. D.C. at 110, 259 F.2d at 925.

A stay of the May regulations with regard to the phasing out of the small refiner bias would ultimately have the effect of increasing the proportion of the bias benefits until they are equal to the whole entitlements pool, thereby reducing the benefits available to other entitlements participants. While this might seem unfair to the other participants in the entitlements pool, it is remediable by further rulemaking proceedings before this effect actually takes place. See Final Regulatory Analysis of the Small Refiner Bias Amendments, pp. 5-8.

On the other hand, permitting all other aspects of the May regulations to take effect would cause no particular harm to other parties which would necessitate the Court to exercise its equitable jurisdiction to enjoin those rules in addition to those designed to phase-out the bias.

VIII

IV. The Public Interest

The court in Virginia Petroleum Jobbers, supra, held that the public interest was a crucial factor where the administration of regulatory statutes designed to promote the public interest was in question. "The interests of private litigants must give way to the realization of public purposes". 104 U.S. App. D.C. at 110, 259 F.2d at 925.

With regard to the proper adoption of regulations to phase out the bias, the interests of the plaintiffs are more closely associated with the public interest than is the government's asserted stake in preserving the integrity of its regulatory programs. Congress set out the public interest in NEPA, in the procedural requirements of the DOE Act, and in the objectives of the EPAA. In granting injunctive relief only with regard to that part of the May regulations which were adopted in contravention of these acts, the Court is ensuring that the public interest which they were designed to protect is indeed being protected according to the law. If the procedural requirements of these acts have been met, however, and if DOE has made the determination lawfully delegated to it in a lawful manner of where the public interest lies, the Court should respect those determinations. With regard to all other aspects of the May regulations, then, the Court finds that the public interest is best served by allowing them to take effect.

CONCLUSION

The analysis of the plaintiffs' motion for a preliminary injunction can best be approached by dividing the disputed May regulations into two parts. The first part deals with the regulations which were previously published in the November NPRM, subject to public comment and assessed under the requirements of NEPA. With regard to this part of the amendments, the Court finds that they were not arbitrary and capricious and did meet the applicable procedural requirements, including the requirements of NEPA. Despite the lack of a showing of success on the merits, injunctive relief might still be proper if the other three Virginia Petroleum Jobbers criteria tilt the balance of equities in favor of injunctive relief. See Washington Metropolitan Area Transit Commission v. Holiday Tours, Inc., supra, 182 U.S. App. D.C. at 223, 559 F.2d at 844. However, after assessing the four applicable factors, the Court concludes that injunctive relief should not issue to enjoin the implementation of that part of the May regulations which were properly promulgated.

The May regulations also include one formula, however which is designed to phase out the small refiner bias in conjunction with the gradual decontrol of crude oil prices. Here the plaintiffs have demonstrated success on the merits, and the other three factors indicate that injunctive relief is appropriate.

ORDER

Based on the Administrative Record before the Court the briefs of both parties, their oral argument, and the above discussion of the Findings if Fact and Conclusions of Law, the Court this 20th day of August, 1979, hereby

ORDERS:

1. The Secretary of Energy, the Administrator of the Department of Energy's Economic Regulatory Administration, and all other officials of the Department of Energy are hereby enjoined from enforcing or applying 10 C.F.R. § 211.67(e)(4) published at 44 Federal Register 25627, May 2, 1979, to the calculation of all benefits or rights accruing to the individual named plaintiffs herein under the Department of Energy's "Entitlements Program" found in 10 C.F.R. § 211.67, until that section is found to comply with all applicable law and necessary procedures.

2. The defendant's motion for summary judgment is hereby granted in all other respects.

3. The plaintiffs' cross-motion for summary judgment is hereby denied in all other respects.

The full text of this opinion is available from ELR (29 pp. $4.00, ELR Order No. C-1212).

29. On April 4, 1979, DOE published an announcement of the availability of an Environmental Assessment. The deadline for comments from interested parties was set on April 17, 1979. Under 10 C.F.R. § 208.12(b)(3) DOE must allow a minimum of 10 days for comment after notice of availability of an EA which makes a negative determination that an EIS is not required.

Counsel for Plaintiffs
William H. Bode
Batzell, Nunn & Bode
1523 L St. NW, Washington DC 20005
(202) 393-8535

William E. Reukauf
1750 Pennsylvania Ave. NW, Washington DC 20005
(202) 347-5065

Counsel for Defendants
Stephanie Lachman Golden
Civil Division
Department of Justice, Washington DC 20530
(202) 633-4107

[OPINION OMITTED BY PUBLISHER IN ORIGINAL SOURCE]